Tobold's Blog
Friday, July 29, 2022
A different view on inflation

If you are following any financial or economic news at all, you will have heard a lot of talk about inflation this year. It is currently at a record high pretty much everywhere. Only the responses to inflation differ very much from one country to the next: In many European countries there is strong industrial action, strikes for higher wages. In anglo-saxon countries there is much less of that, and a strong political message that “inflation is bad for the average American, thus you should do your part to keep it down by not asking for more money”. In the UK the Labour party sacked one of their front men for participating in a strike, as if strikes were anit-labour. That is utter bullshit. Let’s have a look at what inflation really does.

Imagine an inflation that happened in an instant by a wave of a magical wand: All prices doubled, but also all incomes and savings doubled. It is easy to see that this would do absolutely nothing. If the money you have, the money you owe, the money you earn, and the money you spend for goods all rise by the exact same factor, everything remains the same in relation to each other. Even if the sticker price for goods changed, the amount of hours you need to work to buy that item hasn’t. The reason we feel inflation is because everything does *not* rise in parallel. What currently happens, and especially in America, is that prices have gone up, company profits have gone up dramatically, but wages haven’t followed all that fast. So, is inflation bad for the working person? Only if wages don’t keep up with it. It is completely possible that wages rise *faster* than prices, making workers better off. Currently companies and the people who own them are profiting quite nicely from inflation.

If you ever watched Downton Abbey, you might have wondered why a century ago we still had those big houses with lots of servants, and why those have largely disappeared. The answer is inflation. Wages went up faster than the fortunes of the rich. The housemaid or footman suddenly could earn more in a factory than by serving some rich guy, and the rich people lost money in the stock market crash and couldn’t afford those higher wages anymore. Overall that was quite a good thing, and inequality diminished. The decades after WWII were the least inequal in history. Those were the good years for the median income household, for the average worker.

There are big demographic changes ahead. A large generation is retiring, and there are fewer people around to work. That is an excellent opportunity to make the world a better place by industrial action for higher wages. Capitalism is the best system for the creation of wealth, but not the best for its distribution. People need to fight for their fair share of the wealth they helped to create, otherwise we will go back to Downton Abbey and an increasing share of poor people just serving the whims of the rich. Inflation is an opportunity to “tax the rich”, by making sure that wages, welfare, pensions, and other incomes of poorer people rise faster than corporate profits, stock market returns, and other incomes of rich people. But that won’t happen without a fight.

No argument over the general theme that wages need to go up and workers need to be treated better but on a personal level, if the wages were comparable, where would would you rather work? In a stately home like Downton Abbey, doing relatively light, mostly safe work or in a factory, doing relatively heavy, often dangerous work? Not to mention the aesthetic and environmental factors.

It's also misleading to use Downton and similar upper-middle/upper class establishments as the benchmark. Until the first world war, most households down to the lowest echelons of the middle class employed servants.
One of the impacts of inflation is that it reduces wealth inequality because the value of property and investments do not rise in line with rising prices and wages. Perhaps a few years of high inflation could go some way to reducing the widening wealth gap in many western countries. It could also burst some property market bubbles because rising interest rates are a great way to bring down house prices.
The important aspect of any benchmark is that it is known to the audience. Given a lack of popular TV series about the servants in the lowest echelon of the middle classes, we are stuck with upper middle class and upper class of Downton Abbey or Upstairs/Downstairs as a reference.
In the news …
I don’t disagree with your logic and I like the positivity of your view. However, I think we have to take into account the human emotional factors of fear and anxiety that play a part when the economy changes too quickly. Regardless of what people earn or companies can afford to pay, if buyers are too nervous to spend money or businesses don’t have confidence in the future, you can end up in a downward spiral of poor sales, redundancies, increased unemployment etc. It's not that inflation is an issue in itself, it’s the fear it brings that’s the problem.
Post a Comment

<< Home
Newer›  ‹Older

  Powered by Blogger   Free Page Rank Tool